OI 218 • July/August 2011 25

Wealth professionals and theirclients can be forgiven forfeeling confused about whatis happening to Swiss banking

secrecy, particularly now that the so-called ‘Rubik’ solution adds furthercomplexity to the debate.

This should not distract us from thefact that now is a very crucial time fornegotiations by the Swiss government andsome of its most senior diplomats, on anumber of fronts.

The debate rages across a multitude offora and institutions. The list is quite long:G20, OECD - and its recent emanation, the‘Global Forum on Transparency andExchange of Information for Tax Purposes’– the EU and ECOFIN, Switzerland’s largeneighbours, France, Germany and Italy, theUS Government and its Justice Department,the FATF (not to mention the otherdiscussions going on in the internationalbanking arena, such as IMF, FSB, etc).

Each of these entities emits sporadicannouncements, generating a flood ofmedia traffic and press comment, butjournalists rarely seem to connect the dots,preferring to focus on the usually alarmiststatements of one or other of the manyself-appointed demagogues who abound onboth sides of this battlefield.

For the readers of this journal, whom Iassume to be defenders of legitimate,virtuous ‘financial privacy’ (let us abandonthe controversial and emotive term‘banking secrecy’), the news has not beengood, and prima facie, has been gettingworse, since ‘Black Friday’, 13 March 2009.This was the fateful date on which, underintense pressure from G20, the US JusticeDepartment and the OECD, the Swissgovernment finally withdrew itsreservations to Article 26 of the OECDModel Tax Convention and agreed tocomply with OECD standards of taxinformation on request with existing andnew treaty partners.

Bad news – in terms of erosion ofprivacy - continued to flow, all through2009 and 2010. Some of the maindevelopments, discussed below, unfoldedroughly in parallel.

Switzerland and the OECDSwitzerland has demonstrated

impressive zeal in rapidly concluding taxinformation agreements (TIEAs) to includethe Article 26 standard. The FederalDepartment of Finance (FDF) website, asof its last update on 2 March 2011 (seechart below) lists 32 countries with whichdouble tax agreements (DTAs), includingclauses for extended administrativeassistance, have been signed. Ten of theseare already in force, and more are in thepipeline.

The deadline for a referendum – whichmight have slowed this process – passed inOctober 2010.

A new ordinance concerning administrativeassistance in respect of double tax conventions(in French, referred to as OACDI) enteredinto force on 1 October 2010. It sets out

the new regime for accessing information,in line with the OECD procedures foradministrative assistance on request.

Recent further concessions wereagreed, in February of this year, inresponse to G20 insistence on relaxingsome of the pre-requisites for standardsof identification demanded of requestingstates. These were agreed by Switzerland,to align itself with the generally favourabletone of findings of the Global Forum Phase1 Peer Review (see below); predictably thisunleashed more diatribes from prophets ofdoom.

Situation with the USFollowing the UBS debacle, the

government was forced to agree with theUS Justice Department to hand over 4,450UBS client files; while there was hugeresentment and opposition in Parliament,and in Federal Court, the agreement wasfinally implemented, and UBS paid penaltiesof USD780 million after which the case1

against UBS was dropped, but prosecutionsof the clients, of course, continue apace

Good news trumps bad on Swiss banking secrecy: Update on Rubik and other defences of privacy

By Jacques Leuba, Jirehouse Suisse, Lausanne, Switzerland

The Jurisdictions: Switzerland

Austria* Denmark*1 Finland* France* Luxembourg* Mexico*Norway* Qatar Spain*2 United Kingdom*

Hong Kong Malta Rep. of Korea* Romania* Singapore Slovakia*Sweden*

DTAs in force

Signed DTAs

Ireland* Oman Russia* UAE

Initialled DTAs

DTAs with an administrative assistance clause in accordance with theOECD standard

NOTES:* Revision or replacement of existing DTAs1 Including extension to the Faroe Islands.2 Most favoured nation clause: the extended administrative assistance entered into effect with the firstagreement with an EU member state, and consequently at the same time as the agreement with France.

Canada* Germany* Greece* India* Japan* Kazakhstan*Netherlands* Poland* Turkey United States* Uruguay

DTAs approved by parliament

offshoreinvestment.com26

(not all successfully, see below).New arrests of former UBS employees,

and a slew of announcements about newrules for securities businesses, ForeignBank Account Reporting requirements(FBAR) and FATCA – the US attempt at aunilateral, automatic information exchange,globally – have added furthercomplications.

All of this has discouraged Swissinstitutions from contact with any USbusiness because of legal risks. In the wordsof Secretary of State Michael Ambühl, headof the recently created State Secretariat forInternational Financial Matters, “it cannotbe that everyone doing business with theUS already has one foot in prison withoutknowing it”.

Situation with EU and EcofinCouncil:

In decisions during December 2010and February 2011, Ecofin continues toreview and tighten directive 77/799/EEC,reconfirming their intent:a) to take steps to weaken the safeguardsavailable to non-member states underOECD rules for administrative assistanceupon request: the information required bythe requesting state is now being whittleddown to the barest minimum of identityand purpose, avoiding the need to nameany specific institution; b) to proceed with the objective of gradualintroduction of ‘automatic tax informationexchange’ between members of the EU(starting with partial implementation in2015), bullying Luxembourg and Austriainto gradual submission – although, to date,they continue to hold out, thanks toSwitzerland’s outright refusal tocontemplate automatic exchange (and thehopes raised by Rubik – see below).

The long term aim of ECOFIN is toensure “unconditional exchange ofinformation for eight categories of incomeand capital….” meanwhile, “…from 2015,member states will communicateautomatically information for a maximumof five categories…”

This is also bad news for the Swiss onother fronts, in the context of importantSwiss-EU trade and economic agreements(‘accords bilatéraux’), and the desire ofSwiss financial institutions (particularly bigbanks, insurers and fund companies) toextend their activities in the EU andachieve Europe-wide distribution of theirproducts.

Use of information stolen frombanks

Germany, France and other EUcountries are making extensive use of datastolen, chiefly from LGT and HSBC, forthreatening and prosecuting taxpayers.Periodically, names of celebrities drop intothe news (most recently in Spain) as havingbeen cornered on tax offences revealed by

the stolen data communicated acrossborders by the French and Germans toother countries.

On this matter the Swiss, however,have been very firm and excludedadministrative assistance if it can betraced to the use of data obtained byillegal means. An instance of this is thedecision, by the Paris appeal court on 15March 2011, to annul a search warrant inthe home of a taxpayer whose nameappeared as one of the 3000 listed in theHSBC data.2

FATFIn November 2010, the FATF – of

which Switzerland is a member – decided,against Swiss opposition, to adopt the ‘allcrimes money laundering ’ principle,whereby any but the most trivial taxoffences are assimilated to money-laundering and subjected to the samedraconian rules for reporting, tipping offand waivers of privilege, etc., as arealready applied to serious and organisedcrime (terrorism, drugs and armstrafficking, prostitution etc).

Whereas this is now the norm in manyEnglish speaking countries, Switzerland andsome others, including Luxembourg, believethat strong anti-money launderingprovisions already exist and including taxoffences is not consistent with theirdomestic law, which treats certain taxoffences, not involving manifest fraud, asadministrative and not criminal matters.

The longer term significance of FATF’sdecision and how things develop from hereare probably bad news. This certainly addsto the pressure on Switzerland and otherfinance centres. However, fortunately, thedefinition of what is criminal and what isn’twill remain, for the foreseeable future, amatter for each jurisdiction to decide.

Now for some surprisingly good newsfor the defenders of financial privacy inthree areas:

1. Rubik2. Recognition of trusts3. Global forum peer group review

1. Rubik: bilateral withholding taxagreements on track for success withGermany and UK, and others likely.

At this very moment, we hold ourbreath in expectation of further news fromBern, and the German Finance Ministry,about the outcome of their bilateraldiscussions which began in October 2010,on the so-called ‘Rubik’ proposal.

Rubik refers to the assessment,collection and payment by Swiss banks, of afinal flat lump sum tax due to the home -countries of their private clients, wherethese are known to have evaded tax, andwho shall thereby achieve legal taxcompliance but remain wholly anonymous.The French term describes it succinctly:“impôt libératoire à la source”. A good

idea, adapted from previous amnesties, buta challenge to implement, and a historicmilestone in support of legitimising privacy.

It emerged in early 2009, from theAssociation of Foreign Banks in Switzerland,and its vigorous Ticinese chairman, AlfredoGysi, head of BSI (part of Generali group)and certainly an expert on the workings ofthe Italian tax amnesty. After months ofacrimonious debate, he succeeded inconvincing the Swiss private banks andtheir new progressive chairman PatrickOdier and, ultimately, the rest of the banks(against considerable opposition fromdomestic banks and others with conflictingagendas). On that basis, the bankersassociations were able to appeal togovernment to propose Rubik as a brakeon tax information exchange in bilateralnegotiations, both with the EU and withlarge neighbouring countries, in particularGermany.

In October 2010, clever Swissdiplomats, led by the brilliant MichaelAmbühl, emerged with the triumphantnews that, not only Germany but alsothe UK had decided to negotiate withSwitzerland for a ‘Rubik’ deal. Theannouncement also carried the riderthat, in exchange, those countries wouldconsider improving access by Swissinstitutions to their home financial markets.

The FDF have recently confirmed thatdiscussions, details of which are kept tightlyunder wraps, are on track with bothcountries, and that announcements on theoutcomes will be due shortly (‘before thesummer vacation’), with implementationbeing scheduled for the year end.

Rumours have emerged in the Swiss-German press on the possibility that theflat rate agreed for taxing existing capitalsums would be as ‘low’ as 20%, and forcapital gains 26%.

The really good news is that thisproves there is good reason to fight theprinciple of automatic exchange. Rubik fliessquarely in the face of the EUCommission’s dogmatic (indeedfundamentalist) insistence on automatismand will, we hope, facilitate discussions onfuture EU agreements with their rich andtroublesome Helvetic neighbour.

There are ironies aplenty in this debateon principles and practices - wheregovernments and politicians (not leastsome demagogic Eurocrats and MPs) revealdouble standards. The German and UKgovernments were among the zealots forautomatic exchange. But the lure of quickand huge dollops of cash (estimated bysome to be worth between EUR20 andEUR40 billion for Germany) tempers theinquisitional verve. Somewhat surprisingly,the two big Swiss banks, and somedomestic institutions were initially reluctantto back Rubik, citing the high costs ofimplementation and seeming keener toachieve agreement on Europe-wide

Switz

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OI 218 • July/August 2011 27

Switzerland

distribution for their products, rather thanto protect their clients’ privacy.

Rubik is thus a tender plant, at acritical stage of development (nowsometimes referred to as Rubik II), withboth friends and enemies in high places.Its name is well justified: reaching asolution is certainly an arduous andcomplex task, covering a range ofchallenging technical issues, not least ofwhich will be formulating practicaldefinitions for the taxable persons, andthe structures and ‘paying agents’ theymay be using, and how to assess andcompute the amounts due after years ofevasion.

So let us wish the negotiators in Bern,Bonn and London well. It looks like theAthenians will soon be joining them, andwe hope others.2. An important legal decision: trustbeneficiaries in the light of TIEAs

On 23 March 2011, the TribunalAdministratif Fédéral made a historicjudgment in favour of trust beneficiaries.3

The case involved a request foradministrative assistance by the IRS aboutUS taxpayers who were alleged to beclients of UBS, with signatory rights over orultimate beneficial ownership of accountsat that bank.

Between 2009 and 2010 a number ofagreements and protocols were madebetween the two countries which closelydefined criteria for admission of a requestfor assistance and what constituted beneficialinterest. Look-through rules are in place topierce the veil of entities where there is alack of substance, but there is a clearinsistence in the agreements on the needto consider all the specific facts andcircumstances of each case.

In this instance, the case involved anirrevocable discretionary trust. Thehighest Swiss court held that the trustbeneficiaries were not to be considered asbeneficial owners under the terms of theTIEA. Hallelujah! The request was denied,based on the careful analysis of a well-structured estate plan, where the trusteeswere validly empowered to act in adiscretionary manner and not on theinstructions of related parties. (One hopesfor the clients and trustees that they allcomplied with their FBAR and otherreporting obligations, which are not thesubject of the TIEA).

Unfortunately for most of the UBSclients whose files were handed over (andfor a majority of Swiss bank clients underthe pre-2009 regime), such fully-fledged,well-structured (and probably ratherexpensive) estate plans were theexception, for larger, better advised clients,rather than the rule for the hoi polloi. Thegood news is these will now become therule. All TIEAs afford the alleged taxpayeran ultimate right of appeal againstdisclosure. Good structuring, as in this

case, provides the legitimate client with thearguments required to halt disclosure.

Diligent trustees and estate plannersalways knew that they could insist onobtaining a complicated “Form T”, fromtheir Swiss private bankers – i.e. one whichaccommodates full details of relationshipswithin a proper trust arrangement –instead of the simple “Form A”, whichmerely names individuals as ‘beneficialowners’. Now is the time for clients toappreciate the benefit of engaging diligentestate planners and trustees – and for thelatter to reap the rewards of their hardwork, previously passed over by cheap-minded clients in favour of less scrupulousadvisors and fiduciaries.3. Switzerland passes Global Forum‘Peer Review Report’ with flyingcolours

In February 2010, the Federal Councilconfirmed that policy for the financialindustry would henceforth be a “whitemoney strategy”, to be oriented towardthe handling of taxed assets.

To quote the eloquent Michael Ambühl,in a recent speech to the AmericanChamber of Commerce:

“On the one hand, countries have alegitimate interest in tax revenue, includingfrom the income of their citizens’ capitaldeposited in Swiss bank accounts. On theother hand, bank clients have an equallegitimate interest in the protection of theirprivacy. Additionally, banks have an interestin being competitive. For a long time, themanagement of untaxed assets was seen assuch a competitive advantage. This has nowchanged. The understanding has won outthat untaxed assets are in the interestneither of Switzerland, nor the banks, overthe longer term”.This is progress. Additionally, on 1 June

this year, the OECD Global Forum cameout with its Phase One ‘Peer ReviewReport’ on the legal and regulatoryframework in Switzerland4. The process isbeing carried out with 30 countries, whichwill facilitate the drawing of comparisonsand will surely nourish debate for years tocome.

It makes interesting detailed reading,both for the background it gives on theSwiss financial sector and as an example ofthe intricacy and range of issues covered.(Beware demagogues and automaticexchange zealots, who don’t usuallyacknowledge the complexity of thesubject matter.)

The report has, overall, acknowledgedand endorsed the high level of sophisticationof Swiss law and institutions, and the fastpace of Switzerland’s progress towards taxinformation exchange on request accordingto the OECD standard.

There are predictable objections aboutbearer shares, and some intriguing detailsabout the lack of transparency in the wayownership can be organised for Swiss

companies with foreign shareholders. Thesematters will have to be dealt with byproposals to be submitted within sixmonths and will be a prelude for the Phase2 Report, due to start at the end of 2012.The issuing of the report also prompted acompromise by the Swiss on the detailsrequired to identify a client (alreadymentioned above), which are now reducedto a minimum, while neverthelessmaintaining strict safeguards against fishingexpeditions.

On balance, this report is good news –in parallel with the surprising success ofRubik - because of the positive effect it ishaving on the Swiss wealth industry and thepolitical parties, and the level ofsophistication of the debate.

The voice of reason and legitimacy“politique de l’argent propre” has come.Gone, finally, are the days when - until quiterecently - much of the industry, and itsclients, kept heads buried in the sand andwent on using cheap, unplanned, solutions,which achieved nothing for the longer terminterests of client families.

The focus on ‘clean money’, which usedto be referred to as ‘complex’, in contrastto ‘simple’ money (code for black), must begood for the defence of legitimate financialprivacy and for Swiss wealth managers as awhole.

The playing field is levelling – slowly.Singapore and Hong Kong, inter alia willno doubt be able to offer unrivalledadvantages for a while, but these aredisappearing, even in Panama. The new eraof clean money and legitimate clients willbe conducive to attracting and keepingmore institutional players and to bringingin the best of foreign professionals whomay have had concerns previously aboutreputational issues. There are hugeadvantages for private client advisers intaking advantage of Switzerland’s specificrules for independent managers under itsnotably enlightened self-regulatoryregime. While getting stricter, this is stillone of the best adapted and least onerousjurisdictions for independent assetmanagers and wealth professionals, withover 3,000 independents offering highlyindividualised services, not easily accessiblein the larger institutions, to private clientsand entrepreneurs from all over the globe.

In particular, it is to be hoped, Rubikand TIEAs will take the wind out of the sailsof the demagogues and automatic exchangeactivists.

www.jirehouse.com

END NOTES:1. U.S. v. UBS AG, 09-cr-60033, U.S. District Court,

Southern District of Florida (Fort Lauderdale)2. CA, ord. 8 fév 2011, no 10-14507. 3. A-6903/2010.4. http://www.efd.admin.ch/aktuell/medieninformation

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